The Economics of Automatic Systems

Kristen Schulte, and Agri-Business Management Specialist, ISU Extension Team Larry Tranel, Dairy Field Specialist, ISU Extension Dairy Team

Introduction Labor Changes Installation of Systems (AMS) in Iowa One of the leading interest factors of AMS is the reduction continues to grow. It is probable that by 2025, up to 10% of labor. Current hours of milking for the designated herd of dairy producers may be using AMS in their dairy size in a conventional parlor needs to be compared to the operations. In order to assist dairy producers and their anticipated hours of milking labor after the AMS is lenders make informed decisions on the economic installed. Typically, the training period will last three variables associated with AMS consideration, these months, labor rates after this period should be used in the authors developed a partial budget spreadsheet tool. See assumptions. A reduction in time managing labor is Page three for assumptions and calculations. probable.

There are two very important things to note when The herd management software includes rumination, comparing AMS versus conventional parlor milking. First, conductivity and cow activity. This information can lead to many factors are “highly variable” meaning that slight labor savings from heightened heat and mastitis detection changes in milk price or projected change in milk and faster identification of sick cows. There will likely be production, for instance, can significantly change the an increase in records management with the AMS to financial impact. Second, there is limited data to base utilize the software data that might utilized with various assumptions meaning producers and consultants conventional milking systems. will have limited research data for projecting costs and incomes with high confidence levels. Milk Production and Quality Changes Producers may experience losses in milk production six to Herd and Financial Assumptions nine % lower from 3x milking. From 2x milking, one could Herd size is important in calculating the number of AMS expect a three to five % increase or more. This is a huge needed. One AMS can handle an estimate 55-65 milking variable of AMS financial impact. Somatic Cell Counts cows. An additional 10% to 12% herd size can be added (SCC) and bacteria counts tend to increase in the first few when including dry cows. Thus, a 72 cow total herd per months after adoption to the AMS but tends to drop to AMS can be feasible depending upon milk production. initial levels or even lower after the adoption period.

Milk price should be estimated as a long term, projected Feed Costs and Intake Changes average. Estimated cost per AMS should include new Feed cost per pound and intake level changes are seldom building or modifications to existing structures to house accounted for but can be significant. Milk production and the robot and adequate alleys for cow flow. An estimation feed intake have a positive correlation. AMS utilize a of $15,000 to $20,000 per AMS for housing can be pelleted feed during milking which may increase feed cost expected. On average the estimated to cost is around depending on cost and current TMR. However, feed cost $200,000 per AMS; multiple robot systems may provide could decrease relative to previous feeding practices as for price discounts. cows are individually fed with AMS.

Many AMS installed in 2000 are still in operation. So, Culling and Herd Replacement Changes “years of useful life” is an unknown variable. Seven years Most producers report no change in culling percent. But, of useful life is a very conservative estimate while more expected change in turnover rate should be accounted for than 15 years may be risky, especially with the rapid in herds with poor feet and legs or possibly herds with development in AMS technology. The value of AMS after genetic potential for lots of reverse tilt udders. its useful life is also not clearly defined at this time. Utilities and Supply Changes for Milking Interest rate on money should display the rate which AMS systems may increase electrical usage up to 150 kWh represents cost of interest paid or the opportunity cost of per cow per year. Water usage may decrease 50 % or the owner’s money, or, a combination of both. Insurance more for small herds using only one AMS, but water usage rate is the rate per $1,000 of value of AMS. Value of AMS is more comparable for herds using two or three AMS. used for interest and insurance is the full investment value Chemical and supply costs may be higher in some less salvage value. instances but in most instances would slightly decrease.

Bottom Line of AMS: Cows and People Like Them! ISU Extension Publication LT-KS-2013-1 Sample 144 Cow Dairy Converting to AMS Partial Budget Analysis for 140 Cow Dairy

A 144 cow herd and $17.50 per cwt milk price are used as A partial budget considers changes to an operation due to a basis for installing two AMS at a cost of $220,000 per AMS adoption including increased or decreased incomes unit. The annual maintenance cost is $7,000 per robot. or expenses. All costs are on an annual basis. At $17.50 The producer expects a ten year useful life out of the AMS per cwt milk price for 144 cows, an additional $58,212 of at which time he plans to retire and estimates the robots milk production income is generated. Reducing SCC by can be resold for $40,000 each. Using a combination of five % with a $0.003 per 1,000 ml change yielded $1,317 in borrowed and own money, the interest cost is 5.5 %. And, premiums. A one % decrease in cow sales equaled -$1,080 the producer further insures the AMS at a value of in cull cow sales. Expected gain due to the herd software $400,000 higher than the current system at a rate of and related management records is $5,040. Total $0.005 per $1,000 of valuation. increased incomes equaled $63,489.

The producer is currently using 9 hours of labor for milking Decreased expenses that also created a positive impact including set-up and clean-up and expects the time for include labor savings of 0.4 hours of heat detection, 6 fetching cows and clean-up of the AMS area will be 3 hours of milking and 0.6 hour of labor management per hours per day. Heat detection is projected to decrease day. This equates to financial savings of $2,190 in heat from 40 to 15 minutes per day. The labor rate for the detection and $32,850 in milking labor. And reduction in milking and heat detection is currently hired at $15 per labor management time for the owner was valued at hour, including benefits and employment taxes. $3,942. The total decreased expenses equaled $38,982 and when added to increased incomes gave a total The producer recognizes that there will be an additional positive impact of $102,471 by adopting AMS. 0.6 hours per day of records management with the AMS but also estimates there will be a reduction of 0.6 hours On the negative impact side only increased expenses are per day in management of labor. The labor rate for record entered as no decreased incomes are expected. The and labor management is valued at $18 per hour. capital recovery cost of the robots includes the depreciation and annual interest cost of owning the AMS. The herd has a current bulk tank average of 70 pounds per Depreciating the AMS out over ten years and charging 5.5 cow on 2x milking. A seven pound per cow (10%) increase % interest against the purchase value yields a cost of in milk production is projected. The producer also expects $60,200 annually. the AMS to do a better job with pre and post milking sanitation, thus reducing his SCC by five %. The producer Increased repair and insurance costs stems from an annual expects a gain of $35 per cow due to availability of cow maintenance contract on the AMS and the additional production, reproduction and health information. value to insure the AMS at total of $16,000. Additional feed costs of $22,270 come from the dry matter needed to The Total Mixed Ration (TMR) fed to the herd currently produce the additional milk along with changes in total costs $0.125 per pound of dry matter. The daily dry matter TMR costs due to pelleted feed and/or individual feeding intake per cow will increase with the additional seven of cows in the AMS. This producer expected a $0.002 cost pounds of milk. Even though now using a pelleted feed in reduction per pound of dry matter. Due to a one % the AMS, a very small decrease of $0.002, one-tenth of decreased cull rate, heifer replacement costs decrease one cent, is estimated as the change in cost per pound of $2,304. Increased utilities, mainly from electricity, add dry matter due to individual cow feeding. $972 while increased records management labor adds $3,942. Total increased expenses and total negative The producer expects a one % decrease in herd turnover impacts are $101,080. rate. Replacement heifers are valued at $1,600 and cull cows sold for milk or dairy at an average of $750. Net financial impact, positive minus negative impacts, is calculated at $1,391 for this example. But, quality of life An increase of $8.25 per cow per year for electricity is improvements from a flexible management schedule and a anticipated with AMS. Due to neighbor’s experiences, this structured milking schedule is valued at $9,000. With producer estimated a $3 savings per cow for water use quality of life included, the net impact becomes $10,391. and a $1.50 increase in chemical or other supply use.

Iowa State University Extension programs are available to all without regard to So, the adjusted value of the AMS depends heavily on the race, color, age, religion, national origin, sexual orientation, gender identity, variables used and value of the quality of life gained from genetic information, sex, marital status, disability, or status as a U.S. veteran. installing a system. Inquiries can be directed to the Director of Equal Opportunity and Compliance, 3280 Beardshear Hall, (515) 294-7612.

Economics of Robotic Milking Systems v2.0 Annual Partial Budget Analysis Kristen Schulte, Farm Management Specialist and Larry Tranel, Dairy Specialist, Iowa State University Extension and Outreach 2013 Positive Impacts Negative Impacts Increased Incomes Increased Expenses Increased Milk Production $58,212 ISU Capital Recovery Cost of Robots (Dep & Int) $60,200 Increased Milk Premiums $1,317 Extension Increased Repair and Insurance Costs $16,000 Increased Cull Cow Sales -$1,080 D Increased Feed Costs $22,270 Software Value to Herd Production $5,040 A Increased Cow Replacement Costs -$2,304 Total Increased Incomes $63,489 I Increased Utilities and Supplies $972 Decreased Expenses R Increased Records Management $3,942 Reduced Heat Detection Labor $2,190 Y Total Increased Expenses $101,080 Reduced Milking Labor $32,850 TEAM Decreased Incomes Expected Reduced Labor Management $3,942 Total Decreased Incomes $0 Total Decreased Expenses $38,982 Total Negative Impacts $101,080 Total Positive Impacts $102,471 NET ANNUAL FINANCIAL IMPACT = $1,391 Annual Value to Quality of Life = $9,000 with Annual Value of Quality of Life = $10,391 Herd and Financial Assumptions Units Instructions or Reference Values Herd Size -- both milking and dry 144 no. of cows Typical herd size of 66-74 cows/robot Mailbox Milk Price $17.50 $ per cwt. Typical range $13.00 - $20.00 / cwt Estimated Cost per Robot -- include robot housing $220,000 $ per robot Typical range of $185,000 - $230,000 Estimated Annual Change in Milking System Repair $7,000 $ per robot Typical range from $5,000 - $9,000/robot Number of Robots Needed 2 no. robots Typical range of 55-65 milking cows/robot Years of Useful Life 10 years Typical rage is 7 - 15 years Value per Robot after Useful Life $40,000 $ per robot Typical range of 10-30% of purchase price Interest Rate of Money 5.50 % interest rate Value of own or borrowed money Insurance Rate per $1,000 Value 0.50 % Typical rate is 0.5% per 1,000 investment Increased Insurance Value of Robot vs. Current $400,000 $ per farm Value of robot(s) over current system Labor Changes Current Hours of Milking Labor with setup&cleanup 9 hours per day Range of 2 to 5 hours/day per 70 cows Anticipated Hours of Milking Labor 3 hours per day Range of 1 to 1.75 hours/day per 70 cows Current Hours of Heat Detection 0.65 hours per day Typical is 0.25 - .75 hours Anticipated Hours of Heat Detection 0.25 hours per day Typical is 0 - 0.5 hours Labor Rate for Milking and Heat Detection $15.00 $ per hour Typical rate is $10 - $18 with benefits Increased Hours for Records Management 0.6 hours per day Include AMS management records Reduced Hours for Labor Management 0.6 hours per day Include hiring, training, overseeing, etc. Labor Rate for Records and Labor Management $18.00 $ per hour Typical rate of $12 - $25 Milk Production, Herd Health, Reproduction and Milk Quality Changes Lbs of Milk per Cow per Day, Past Year 70 lbs/cow/day Typcial range of 50 - 90 lbs Projected Change in Milk Production 7 lbs/cow/day Typical 5-15% more if 2x; 0-10% less if 3x SCC Premium per 1,000 SCC Change $0.003 $ per cwt Typically $0.002 - $0.004/cwt Current Annual Bulk Tank Average SCC 240,000 SCC per ml Typical range of 100,000 - 400,000 SCC Estimated Percent Change in SCC -5.0 % Typical range of -10 to +2% Reproduction and Herd Health Value of Software $35.00 $ per cow/year Estimated range of $20 - $60 per cow/yr Feed Costs and Intake Changes Lbs of TMR Dry Matter (DM) per lb of Milk 0.65 lb DM/lb Milk Typical range of 0.55 - 0.8 Cost per lb of TMR Dry Matter $0.125 $ per lb DM Typical range of $0.8 - $0.15 Estimated Change in cost/lb Dry Matter -$0.002 $ per lb DM Typical range of -$0.005 to +$0.005 Culling and Herd Replacement Changes Cost of Replacement Heifer $1,600 $ per heifer Typical range of $1,300 - $2,200 Cull Price per Cow (or sold for milking purposes) $750 $ per cow Typcial range of $350 - $1,200 Expected Change in Annual Turnover Rate -1 % Typical change has been very small Utilities and Supply Changes for Milking Anticipated Change in Electricity cost $8.25 $/cow/year Typical increase of 0 - 150 kWh Anticipated Change in Water cost -$3.00 $/cow/year Typical range of -$5 to +$5 Anticipated Change in Chemicals Cost $1.50 $/cow/year Typical range of -$2 to +$2 The authors have used their best judgement and shall not be liable for any use of this software decision-making aid. Cash Flow Changes Sensitivity Analysis of AMS

The cash flow changes when evaluating AMS must be The following list depicts the change in net financial differentiated from the net financial impact. The net impact as a dollar value and percent change when the financial impact in the partial budget focuses on all tested variable was changed by a positive ten percent changes in incomes and expenses, whether paid in cash with all other values held constant. or not. The cash flow change only focuses on the sources Increase Value by 10 Percent $ Change and uses of cash. Herd Size $4,255

Milk Price $5,821 In the sample farm, the net financial impact was $1,391, Cost per AMS -$6,820 not considering value to quality of life. Since depreciation is not a cash cost, the capital recovery cost of $60,200 Change in Repair Cost -$1,400 needs to be added back and the principal and interest of Years of Life $3,273 the needed loan be deducted. In this example, a 7 year Resale Value of AMS $800 loan of $400,000 was needed with an interest rate of Interest Rate -$2,420 5.5%. The annual payment on this loan would be $68,976 Insurance Rate/$1,000 Value -$200 meaning the net cash flow would change by -$8,776. Increased Insurance Value -$200 Current Hours of Milking Labor $4,928 A second cash flow change from the partial budget is the Anticipated Hours of Milking Labor -$1,642 difference between paid and unpaid labor. The net Current Hours of Heat Detection $356 financial impact showed a labor savings of $35,040. Anticipated Hours of Heat Detection -$137 Subtracting paid labor from labor savings equals the amount of unpaid labor of $15,040 which is a non-cash Rate for Milking/Heat Detection $3,504 expense. This non-cash difference needs to be Increased Hours Records Mgt -$394 subtracted from the net financial impact. Reduced Hours Labor Mgt $394 Rate for Records/Labor Mgt -$1,391 Time for increased records management was equal to Current Bulk Tank Average $552 reduced labor management resulting in a $0 gain. Both Projected Change in Milk Production $3,174 management costs are also unpaid. This also needs to be SCC Premium/1,000 SCC Change $132 subtracted from the net financial impact. Current Bulk Tank SCC $132

Estimated Percent Change in SCC* $132 So, the net financial impact of example was: $1,391 Value of Software $504

Principal and interest payment over Lbs TMR Dry Matter/lb of Milk -$2,227 the capital recovery cost adds: -$8,776 Cost/lb of TMR Dry Matter -$2,703 Change in cost/lb TMR Dry Matter* $476 Adjustment for unpaid labor and management Cost of Replacement Heifer $230 for: heat detection and milking adds -$15,040 Cull Price per Cow -$108 records and labor management adds $0 Change in Annual Turnover Rate* $122 Change in Electricity cost -$119 Thus, the total change in cash flow using the Change in Water cost* $43 net financial impact from the partial budget Change in Chemicals Cost -$22 as a base is: -$22,425 * means original input value was negative.

So, the net financial impact of $1,391 includes all changes Users are cautioned that slight changes in input values of income and expenses including depreciation and can dramatically influence the net financial impact of an unpaid labor. The change in cash flow considers principal AMS analysis. The table above shows net financial impact and interest payments and subtracts out expenses such when changing input values by 10 %. Change in Cost per as unpaid labor that were not paid in cash. AMS and Milk Price are the most significant variables at $6,820 and $5,821, respectively. Thirteen variables In other words, the AMS, when balanced with quality of change the net financial impact by over $1,000. So, even life concerns and other positive financial assumptions due robots are sensitive!  to the herd management software can be a good investment. However, depending on labor, cost of capital In sum, AMS variables need careful discernment in order and debt structure, AMS may result in negative cash flow. to confidently make decisions as to what financial and cash flow impact AMS will have on a dairy farm.